What are Illinois pensions?
Public pensions are monetary benefits given to government employees in Illinois. Government employees in Illinois—such as teachers or prison workers—who receive pensions, are enrolled in what is known as a defined benefit plan. This is not to be confused with a defined contribution plan, which some private employers have in place for their employees. Such a plan is not available to most public employees.
Defined Benefit Plan for Public Employees in Illinois
A defined benefit plan provides government workers in Illinois with a guaranteed lifetime retirement benefit based upon the number of years they served in government as well as the salary they received toward the end of their working life. The majority of public pension plans are defined benefit plans. Although most statewide plans require employee contributions, the benefit is not tied directly to the amount of those contributions. As defined benefit plans are run by the employer, employees do not have any say in the manner in which their funds are invested.
Under such plans, a set percentage of an employee’s annual salary is diverted into a pension fund over the course of the employee’s career. At the same time, the state’s taxpayers contribute to employee pension funds as well. The money is invested in stocks, mutual funds and other monetary instruments in order to increase the value of the pension fund. A guaranteed amount of money is made available to retired employees every year through monthly disbursements from the pension fund.
Contributions into defined benefit plans are, therefore, made by:
- Public employees
- Return on investments
- State contributions from taxpayers
Defined Contribution Plans in Illinois
Defined contribution plans typically include contributions by both employers and employees. Employees in defined contribution plans do have some choice as to how and where their money in these funds are invested.
A typical example of such a retirement savings plan is a 401(k) account where a certain amount of an employee’s paycheck is deducted each pay period and invested. The employer frequently, but not always, also contributes to employee accounts, up to a certain percentage.
While public employees in Illinois do not receive benefits under defined contribution plans, a hybrid plan now is available for some public employees. Under hybrid plans, employees who began government work after a certain year are eligible for both defined benefit and defined contribution plans. Newer employees have the option of enrolling in hybrid plans. It should be noted however, that despite the existence of hybrid plans, the vast majority of public employees in Illinois still are enrolled in the traditional defined benefit plan, also known as the Tier I plan.
In 2010, Illinois lawmakers created a second tier of pension beneficiaries. Public employees who began working for the state after this plan was adopted were funneled into this tier, with lesser pension benefits than those who came before. Lawmakers pushed through this plan in an attempt to begin to tackle the problem of a projected shortage of money in the state’s pension funds.
The tiers create levels to measure maximum salary, employee contributions, spouse and survivor annuities, years of service and the age upon which employees can begin collecting their pensions. While some funds use a combination of these factors to determine when workers can retire, other funds allow workers to retire at any age if they have worked a certain number of years in order to reap the maximum allowable pension benefits.
The Illinois Pension Primer by the Civic Federation provides the following example: If the regular retirement age for a Tier I employee is 62, that employee first must work five years in order to receive maximum pension benefits. If the regular retirement age for a Tier I employee is 60, they must have first worked for 20 years before they can receive their full pension benefits. If the retirement age for a Tier I employee is 55, they must work 34 years before they can qualify for full retirement benefits.1
However, if the employee in question is a Tier II employee, the regular retirement age is 67 and, in order to receive a maximum pension benefit, they must first have worked 10 years.2
State Pension Funds
The Act introducing Tier 2 employees affected new members of all state pension funds. These include:
- Teachers Retirement System (TRS)
- State Employees’ Retirement System (SERS)
- State Universities Retirement System (SURS)
- The General Assembly Retirement System (GARS)
- Judges Retirement System (JRS)
Cook County Pension Funds
- County Employees’ and Officers’ Annuity and Benefit (A&B) Fund
- Forest Preserve District Employees’ A&B Fund
- Metropolitan Water Reclamation District Retirement Fund
City of Chicago
The city of Chicago currently contributes to five pension funds which also are placed in two tiers. They include:
- Municipal Employees' Annuity & Benefit Fund of Chicago (MEABF)
- Laborers' & Retirement Board Employees' Annuity & Benefit Fund (LABF)
- Policemen’s Annuity & Benefit Fund
- Firemen's Annuity & Benefit Fund
- Park Employees’ Annuity & Benefit Fund
Chicago also has a separate pension fund for teachers called the Chicago Teachers’ Pension Fund.
Suburban and Downstate Pension Funds
Other governmental units have their own pension systems, which, effective January 1, 2011, also split pension benefits based on the tiers their employees fall under.3 They include:
- Suburban and Downstate Police Pension Funds
- Suburban and Downstate Firefighters’ Pension Funds
- Illinois Municipal Retirement Fund
- Illinois Municipal Retirement Fund - Sheriff Law Enforcement Employees
- Illinois Municipal Retirement Fund - Elected County Officials
In July 2017, the General Assembly approved a law that introduced a third tier into the pension benefit structure. The Tier III plan is a significant change to the Illinois Pension Code and creates a hybrid retirement plan. It consists of the combined benefit plan as well as the defined contribution 401(k)-style plan. The Tier III plan also is optional for existing and future Tier II members.
1 The Civic Federation, Illinois Pension Primer, A Plain-English Guide to Public Employee Pensions in the State of Illinois (Apr.22, 2015).
3 Illinois Department of Insurance, Public Pension Division, Public Pension Report (2011-2012) (2013).
What is the Illinois pension crisis and how did it happen?
The Illinois pension plans were introduced in 1915.1 In 1949, the Illinois Public Employees’ Pension Laws Commission published a report highlighting the “tremendous, ever-increasing, disproportionate” unfunded liabilities the pension plans were facing, and the deficits that were being created.2 In 1959, another report by the Illinois Public Employees’ Pension Laws Commission stated that unfunded liabilities were increasing “for the most part from the inadequacy of government contributions in the prior years.”
Illinois’ first attempt to tackle the problem of underfunded pensions resulted in the rewriting of the state Constitution, for the fourth time. In 1970, Article XIII, Section 5, of the Illinois Constitution was born, granting extraordinary protection to employees who collect public pensions.
The state Constitution now requires that the government fulfill its public pension obligations as they become due; and treat its public pensions as “contracts.”
In its entirety, the Article states:
“Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”
Despite that addition, since then, lawmakers and governors from both major political parties repeatedly have skipped required contributions, or contributed less annually than they should have or have borrowed from the funds to finance other projects or employee salary increases. As a result, the funds inability to cover payouts for all projected employee needs has grown exponentially.
Some Key Dates in Illinois’ Pension Crisis:
1989: Republican Gov. Jim Thompson signed a pension package significantly increasing the annual cost-of-living adjustment to 3 percent, compounded on the total pension benefit and not the original amount. This increase in benefits correspondingly increased the state’s obligations in the long-term and contributes greatly to the pension debt in Illinois.
1994: Former Republican Gov. Jim Edgar dealt with the state’s worst-in-the-nation unfunded pension liability”3 —by signing what has become known as the “Edgar Ramp” into law. The ramp was a 50-year plan that attempted to stabilize and restore the state’s retirement systems. Its primary goal was to have each pension system in Illinois 90 percent funded by 2045. The amount of money that was to be put into the pension systems by the state—money paid by taxpayers—was set intentionally low for the plan’s initial 15 years. In later years, the plan escalated the amount paid by taxpayers and significantly increased the level of payments to be made into the pension systems.
The rationale behind these increases and decreases in payment levels was to allow politicians room to adjust to the plan and comply with its requirements with relative ease in the initial stages of the program. In later years, it was hoped that future leaders would have the capacity to put more money into the pension programs.
In actuality, all did not go according to plan. The investments made in the first 15 years were insufficient to meet the plan’s funding goals, and each year that the state was unable to meet its payment as required under the ramp, costs are pushed into the future. The payment amount due in the state’s 2016-2017 budget year is $7.6 billion.4 That amount means that nearly a quarter of every $1 taxpayers send to Springfield goes toward paying retirees.
“The Edgar Ramp” - Pension Costs as a Percentage of Total General Funds5
2001: The recession and stock market collapse drastically affected the assets of each pension fund in Illinois as pension investments plummeted in value.
2002: GOP Gov. George Ryan signed a bill creating a generous early retirement program for some state employees. Instead of fulfilling the previously required years of service until retirement, employees could “buy” the remainder of the years they needed to retire.
For instance, if a state employee had to work 30 years before they could retire, but he or she had only worked for 25 years, that person could buy the remaining five years needed to qualify for retirement.
This saved the state money in the short run as employers had fewer salaries to pay, but it only added to the pension debt as it created an influx of retirees.
2004: The state borrowed $10 billion under Gov. Rod Blagojevich, allocating $7.3 billion for pension plans to cover obligations. This provided a quick boost to the pension systems’ funded ratio raising it to nearly 61 percent from 49 percent.6
While the loan expanded the pool of pension funds required to generate short-term returns on investment, it failed to lower the state’s overall obligations. Instead, the interest on the loan was added to the state’s existing pension obligations. Furthermore, the sudden boost in the cumulative funded ratio of the pension systems was used as a rationale for skipping state contributions owed in 2006 and 2007.7
2005: A partial “pension holiday” was approved by lawmakers which allowed the state to temporarily suspend its contributions into workers’ retirement funds.
2006-2007: The state contributions made during pension holidays were only about half the required amount. The state skipped paying $2.3 billion into the pension funds.8
2008-2010: In order to fill in the $2.3 billion monetary gap created as a result of skipped payments, the state had to make considerably larger payments between 2008-2010. In addition to this, the 2008 Great Recession and stock-market crash coupled with the collapse of the dot-com bubble in the early 2000’s led to additional pension-investment losses in the amount of $15.9 billion.9 This led to the state taking out a loan to cover its FY 2010 payments.10
2011: The state took out another loan to cover payments and, as a Crain’s publication noted, another “adjustment downward in long-term investment return assumptions” increased Illinois pension systems’ liabilities by an additional $9.8 billion.11 In order to help fund pension contributions, the state also raised personal income tax rates by 67 percent to 5 percent and corporate income tax rates by 47 percent.12
2012: State pension debt reached $96 billion, according to the governor’s budget office.
2013-2015: In December 2013, Governor Pat Quinn signed what was considered a landmark pension bill,13 Public Act 98-599, into law. It included a number of provisions aimed at reducing annuity benefits for Tier 1 members of GRS, SERS, SURS and TRS.14 However, the act later was found to be unconstitutional by the Illinois Supreme Court, which unanimously held “there is simply no way that the annuity reduction provisions in Public Act 98-599 can be reconciled with the rights and protections established by the people of Illinois when they ratified the Illinois Constitution of 1970 and its pension protection clause.”15
The state argued that it faced a grave “financial emergency” as a result of its unpaid pension obligations and was, therefore, unable to meet the provisions of the pension protection clause. The Court rejected this argument holding that a mere unanticipated exigency did not warrant disregarding constitutional provisions. It held that “if something qualifies as a benefit of the enforceable contractual relationship resulting from membership in one of the State’s pension or retirement systems, it cannot be diminished or impaired.”16
1 Hooker, George Ellsworth, Report of Illinois Pension Laws Commission, University of California Libraries, 1917, p. 38 (1861).
2 Logan Jaffe, Illinois Problems Go Back Decades, WBEZ News (Dec.18, 2012).
3 Eric Zorn, The ‘Edgar Ramp’ Took Illinois Downhill, but Many Share the Blame, Chicago Tribune (June 14, 2016).
4 Dave McKinney, The Illinois Pension Disaster, What Went Wrong?, Crain’s Chicago Business (Aug.10, 2015).
8 Matt Dietrich, Perfect Storm for Illinois Pension Disaster, Reboot Illinois (Sep.13, 2013).
9 McKinney, supra note 4.
10 Dietrich, supra note 8.
11 McKinney, supra note 4.
12 Dietrich, supra note 8.
13 Monica Davey & Mary Williams Walsh, Pensions and Politics Fuel Crisis in Illinois, N.Y Times (May 25, 2015).
14 In re Pension Reform Litigation, 2015 IL 118585.
15 Id. at ¶47.
16 Id. at ¶44 and ¶56.
What are unfunded liabilities?
When a person, entity, or organization owes a payment at any given time, but does not presently possess the funds to make those payments, those are known as unfunded liabilities. When a pension plan has payment obligations—such as income benefits, termination benefits, and retirement benefits—but does not possess the funds to meet those obligations, that plan has an unfunded liability.
What is a cost of living adjustment?
When a person retires, they receive an increase in their pension benefit each year through an annual cost-of-living adjustment, or COLA. COLAs ensure the purchasing power of retirement benefits are not eroded by inflation.
In Illinois, COLAs result in an automatic, annual 3 percent increase in a retiree’s yearly benefits based upon the adjusted annual amount from the previous year.1
1 State Employees’ Retirement System of Illinois (SERS), Glossary of Retirement Terms, https://www.srs.illinois.gov.
How many pension funds are there in Illinois?
There are 667 government-worker pension funds in Illinois:
State-run funds: 5 for downstate and suburban teachers, state employees, state university employees, judges, and Illinois lawmakers
Suburban and downstate police pension funds – 356
Suburban and downstate firefighter pension funds/pension funds for suburban and downstate municipal workers – 297
Pension funds in Chicago – 6
Pension Funds in Cook County – 3
What is the makeup and funding level of the state pension funds?
There are five state pension systems in Illinois:
1. Teachers Retirement System
The Teachers Retirement System (TRS) is the largest pension fund in Illinois and manages funds for teachers everywhere in Illinois except Chicago. Members of TRS include public school teachers and administrators who are not eligible for Social Security retirement benefits.1
As of 2016, TRS had 133,636 active members and nearly 105,937 retirees.2 Currently, active workers contribute 9.4 percent of their salary to the pension system. The average age of a retiree in TRS is 71 and the average annual pension received by a TRS member is $54,252.
In 2016, TRS was 38.1 percent funded and had $73.37 billion in unfunded liabilities.3
2. The State Employees’ Retirement System
Pensions for many state employees across Illinois are managed by the State Employees’ Retirement System (SERS). Members of SERS are state employees not covered by other funds.
SERS has 61,317 active members and 63,146 retirees.4 Not all SERS members are covered by Social Security—those who are, contribute 4 percent of their salary to this pension fund, and those who are not contribute 8 percent of their salary. The average age of a retiree is 69 and the average SERS pension is $28,496.
In 2016, SERS was 33 percent funded and had $30.47 billion in unfunded liabilities.5
3. The State Universities Retirement System
The State Universities Retirement System (SURS) manages pensions for employees working at state universities. These include teachers and staff at Illinois universities and community colleges. Members are not eligible for Social Security. SURS has 66,245 active members and 63,146 retirees.6 The average age of a retiree is 62.7. Active members contribute 8 percent of their salary to the pension system and the average pension amounts to $54,949.
In 2016, SURS was 41.5 percent funded and had $23.94 billion in unfunded liabilities.
4. The Judges Retirement System
This pension system has 951 active members and 767 retirees.7 JRS manages pensions for judges across the state of Illinois. Its members contribute 11 percent of their salary to the pension system. Members of JRS are not eligible for Social Security. The average age of a retiree is 71.8 and the average pension is $135,996.
In 2016, JRS was 33 percent funded and had $1.7 billion in unfunded liabilities.
5. The General Assembly Retirement System
The General Assembly Retirement System (GARS) manages pensions for members of the Illinois General Assembly and select state officials within Illinois. It currently has 141 active members and 299 retirees. Its members contribute 11.5 percent of their salary to the pension system. Members of GARS are not eligible for Social Security. The average age of a retiree is 72.9 and the average pension of a member is $60,108.
In 2016, GARS was 13.5 percent funded and officially had $314.3 million in unfunded liabilities.8
During fiscal year 2016, the total unfunded liabilities for all five of the retirement systems increased to $129.8 billion from $112.9 billion in FY 2015.9
Accrued Liability by Pension Fund (FY 2016)
1 Reboot Illinois, Pension Fund Profiles: A Snapshot Look at Illinois’ Five Pension Funds (Mar.5, 2017).
2 Teachers’ Retirement System of the State of Illinois, Comprehensive Annual Financial Report for the Fiscal Year Ended June 20 2016 (2016).
4 The State Employees’ Retirement System (SERS), A Pension Trust Fund of the State of Illinois, Comprehensive Annual Financial Report (2016).
5 Commission on Government Forecasting & Accountability, Illinois State Retirement Systems, Summary of Financial Condition FY 2016, State Retirement Systems Combined (Table 4), p. 25 (2017).
6 The State Universities Retirement System (SURS), Annual Financial Report Summary (2016).
7 Judges’ Retirement System of Illinois (JRS), Comprehensive Annual Financial Report (2016).
8 General Assembly Retirement System (GARS), State of Illinois, Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2016 at p. 14 (2016).
9 Commission on Government Forecasting & Accountability, Illinois State Retirement Systems, Summary of Financial Condition FY 2015, Illinois State Retirement Systems, Table 4, (March 2016).
How are pension funds invested?
The Actuarial Value of Assets
This is the value of all pension plan investments. Employees do not have direct access to their pensions, nor do they have individual accounts through which they can access their pensions under a defined benefit plan. Instead, their pension funds are invested by the State. After these investments are made, an actuary—a person who measures the risk factors and uncertainty involved in financial matters—determines an “actuarial valuation.”1
The increase in unfunded liabilities in FY 2016 equates to an increase in unfunded liabilities of 12.1 percent over FY 2015. This increase can be attributed to the following:2
- Insufficient state contributions
- Poor investment returns
- Actuarial assumption changes
1 Marilyn Oliver, FSA, Assessment and Selection of Actuarial Assumptions for Measuring Pension Obligations, Education and Examination Committee of the Society of Actuaries, Course EA-2, Segment A, Study Note, p. 3, (September 2009).
2 Commission on Government Forecasting & Accountability, Illinois State Retirement Systems Financial Condition as of June 30, 2016 (March 2017).
What is an actuarial assumption?
An actuarial assumption is an estimate of an uncertain variable input into a financial model, normally for the purposes of calculating premiums or benefits. For example, a common actuarial assumption relates to predicting a person's lifespan, given their age, gender, health conditions and other factors.
In FY 2016, market value investment returns for all five state systems were well below 1 percent:1
- TRS: -0.1%
- SERS: -0.8%
- SURS: 0.2%
- JRS: -0.8%
- GARS: -1.0%
Some of the factors that caused an increase in unfunded liabilities since FY 1996 include salary increases, investment returns, employer contributions, benefit increases, and changes in assumptions.2 The largest factor was insufficient state contributions which caused a $44.7 billion unfunded increase during this period. Changes in actuarial assumptions caused an additional increase in unfunded liabilities of $31 billion during the same period.
Due to lower-than-projected investment returns, insufficient employer contributions, and all the interest incurred on the unfunded liability, the combined funded ratio (assets divided by liabilities) dropped to 37.6 percent in FY 2016.3
In 2017, all five systems exceeded their actuarially assumed investment rates and according to the Commission on Government Forecasting and Accountability, experienced “significantly strong investment returns”4 as follows:
- TRS: 12.4%
- SERS: 12.2%
- SURS: 12.2%
- JRS: 11.6%
- GARS: 10.5%
1 Commission on Government Forecasting & Accountability, Illinois State Retirement Systems Financial Condition as of June 30, 2016 (March 2017).
2 Commission on Government Forecasting & Accountability, Report on the 90% Funding Target of Public Act 88-0593 (January 2006).
3 Commission on Government Forecasting & Accountability, supra note 1.
4 Commission on Government Forecasting & Accountability, Illinois State Retirement Systems Financial Condition as of June 30, 2017, p.34 (March 2018).